Public Lecture PPT (6.29.2012)
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The document analyzes why Japan is not like Greece in facing its debt crisis and argues that Japan can sustain its debt for the following key reasons: 1) Japan has a large trade surplus and net international asset position that can finance its debt, 2) interest payments on Japan's debt remain low despite rising debt levels, and 3) Japan has policy tools like quantitative easing to boost demand and reduce deflationary pressures. However, the document notes Japan's growth remains weak with productivity gains slowing.
Public Lecture PPT (6.29.2012)
- 1. Noda’s Mistaken Priorities Japan is not the next Greece Richard Katz The Oriental Economist Report © 2012 rbkatz@ix.netcom.com www.orientaleconomist.com Temple University In Japan June 29, 2012 1
- 2. Why Japan Is Not Greece 12% 10% Current account, % of GDP, 2005-10 average 8% Holland Germany 6% Japan 4% Austria 2% Belgium 0% UK France -2% Italy -4% USA Ireland -6% -8% Spain -10% -12% Portugal Greece -14% -80% -60% -40% -20% 0% 20% 40% 60% 80% 100% 120% 140% Net govt debt, % of GDP, 2010 2
- 3. Income, Not Trade, Drives CA Surplus 28 140% 26 24 120% 22 Balance of payments (tril. yen) 20 100% 18 16 80% 14 12 60% 10 8 40% 6 4 20% 2 0 0% -2 -4 -20% 85 87 89 91 93 95 97 99 01 03 05 07 09 11 Trade balance (left) Int'l Incom e (left) Incom e % of Curr. Account (right) Even if trade deficit, no CA deficit for perhaps a decade, then net assets 3 to draw upon
- 4. Why Japan Isn’t Greece (cont.) 75% 50% Japan Net Int'l Assets, % of GDP. 2009 or 2010 Belgium Holland Germ any 25% 0% UK US France Italy -25% -50% -75% Spain -100% Greece Ireland Portugal -125% -80% -60% -40% -20% 0% 20% 40% 60% 80% 100% 120% 140% Net Govt Debt, % of GDP, 2010 4
- 5. Low Growth Expands Deficit; Better Growth Lowers It 8% Decrease during 2002-07 recovery, then explosion in 2009-09 recession 7% Primary budget balance, % of GDP 6% 1997-2001 recession and stagnation 5% 4% 3% 2% 1% 0% -1% -2% 84 86 88 90 92 94 96 98 00 02 04 06 08 10 Primary deficit is deficit aside from debt service 5
- 6. Interest Payments Still Low Despite Debt Explosion 150% 5.5% 140% Net Governnm ent Debt (left scale) 5.0% 130% 120% 4.5% 110% 4.0% 100% 3.5% 90% % of GDP 80% 3.0% 70% 2.5% 60% 2.0% 50% 40% 1.5% 30% 1.0% 20% 0.5% 10% Net Interest Paym ents (right scale) 0% 0.0% 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 6
- 7. Slack Demand For Credit Keeps Interest Rates Down 2.2% 2.0% 1.8% 1.6% 10-year JGB yield 1.4% 1.2% 1.0% 0.8% Panic due to irrational fear of run on banks 0.6% 0.4% 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 7
- 8. Consumer Spending Flat Because Household Income Flat 115 115 110 110 Income and Consumption (real, 1997=100) 105 105 100 100 95 95 90 90 85 85 80 80 75 75 70 70 65 65 60 60 55 55 50 Real Disposable Incom e 50 45 Real Consum ption 45 40 40 1980 1984 1988 1992 1996 2000 2004 2008 8
- 9. Tax Shifts Income From Households to Firms 12,000 Change in annual taxe, 1988-2012 (Bil. Yen) 10,000 8,000 6,000 4,000 2,000 0 -2,000 -4,000 -6,000 -8,000 -10,000 Total Corporate Incom e Other Consum ption Corporate tax down mainly due to tax cuts; 2011 profits up 3% from 1988, 9 up 11% at big firms that pay most of corp. taxes
- 10. Gov’t Borrowing Makes Up for Reduced Private Borrowing 300% 300% 275% 275% 250% 250% 225% 225% Governm ent net 200% debt 200% Debt as % of GDP 175% 175% 150% 150% Households 125% 125% 100% 100% 75% 75% 50% Non-Financial Corps. 50% 25% 25% 0% 0% 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 10
- 11. Budget Deficit, Trade Surplus Replace Private Demand Shortfall 4% 4% 2% 2% 0% 0% -2% -2% -4% -4% % of GDP -6% -6% -8% -8% -10% -10% -12% -12% -14% -14% -16% -16% 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 CY Budget deficit Trade surplus Private dem and gap 11
- 12. GDP Still 2.3% Below Peak; Forecast: 6 Years To Regain Peak 2% 1% 0% Cumulative GDP change -1% -2% -3% Jan-March 2012 -4% -5% -6% Tsunam i -7% -8% From Jan-Mar 1997 -9% From Jan-Mar 2008 JCER forecast -10% 0 1 2 3 4 5 6 Years from pre-recession peak 1995 Kobe earthquake barely registered in GDP tables; electricity makes the difference 12
- 13. Joblessness Seen In Reduced Hours, Not Unemployment Rate 2% Jobs Hours 1% 0% Change from 2000 (3-mo MA) -1% -2% -3% -4% -5% -6% -7% -8% -9% -10% -11% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 13
- 14. All Growth From Productivity… 130 130 125 GDP 125 120 120 115 115 110 110 105 Productivity 105 100 100 1990=100 95 95 90 90 85 85 80 80 75 75 70 Work Hours 70 65 65 60 60 55 55 50 50 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 Productivity = GDP per workhour 14
- 15. …But Productivity Anemic 1.4%; GDP Just 0.9%, Per Capita Just 0.7% 6% 6% 5% Average productivity grow th 1991-2011: 1.4% 4% 4% Year-on-year growth (2-qtr MA) 3% 2% 2% 1% 0% 0% -1% -2% -2% -3% -4% -4% -5% -6% -6% GDP -7% Productivity (GDP per hour) -8% -8% 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 No current structural reform policies to accelerate productivity, such as farm reform, competition policy, labor market, or TPP 15
- 16. Anemic Per Worker GDP Will Mean Lousy Per Capita GDP 1.2% 0.9% 1.0% 0.8% 0.6% 0.3% 0.4% Annual % decline 0.2% 0.0% -0.2% -0.4% -0.2% -0.4% -0.6% -0.8% -1.0% -0.9% -1.2% 20-64 -1.4% -1.3% Total population Per capita GDP -1.6% 2011-15 2016-20 Per capita GDP growth assumes productivity growth remains at 1.4% and no change in workhours per working age person; actual growth should be 16 higher in the process of economy getting back to full capacity
- 17. Low Growth Worsens Deflation; Better Growth Fights It 5% 3.0% 4% 2.5% Correlation = 79% 3% 2.0% 2% 1.5% Deflation (domestic demand) 1.0% 1% 0.5% 0% Output gap 0.0% -1% -0.5% -2% -1.0% -3% -1.5% -4% -2.0% -5% -2.5% -6% -3.0% Output gap (left) -7% -3.5% Deflation, dom estic dem and (right) -8% -4.0% 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 Output gap is gap between actual GDP and what GDP would be at full employment and full capacity-utilization; better growth would eliminate gap 17
- 18. 2011 Cut In Electricity Per GDP 1.86 2001-2010 average 1.84 1.82 1.80 1.78 KwH per Y1,000 GDP 1.76 1.74 1.72 1.70 1.68 1.66 1.64 1.62 1.60 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 18
- 19. Nukes Down; Oil, LNG Way up 90 Feb. 2011 Feb. 2012 Change 80 70 60 50 Electricity, bil. KwH 40 30 22 20 10 3 0 0 -10 -20 -20 Total Thermal Nuclear Hydro 19
- 20. Electricity Demand Down Because GDP Still Down From 2007 Peak 0% 1 2 -1% Due to Change from 2007 to 2011 -2% GDP fall -3% Total Kw H -4% Decline Due to -5% less -6% Kw H per GDP -7% -8% -9% 20
- 21. And Because Mfg. Still Down 12% 104 104 100 100 Industrial Production Index, 2007-IV = 100 96 96 92 92 88 88 84 84 80 80 76 76 72 72 68 68 64 64 00 01 02 03 04 05 06 07 08 09 10 11 12 21
- 22. Unhealthy Dependence on Trade Surplus to Drive Growth 60% Share of GDP 55% Share of GDP Grow th Share of GDP Growth 02-I to 07-IV 50% 40% 40% 34% 29% 30% 20% 16% 10% 5% 0% -10% Trade Surplus Investm ent Household Consum . 22
- 23. Trade Surplus Still Pivot For Growth 7% 6% 5% Contribution to change in GDP (%) 4% Rest of GDP 3% 35% of recovery 2% 1% Net Exports 0% -1% -2% Net Exports 45% of drop -3% -4% -5% -6% -7% Rest of GDP -8% -9% -10% 08-I to 09-I 09-I to 12-I 23
- 24. Real Yen Below 25-Year Average 145 145 140 140 Nominal rate 135 135 130 130 125 125 120 120 115 115 110 110 (1986-2012=100) 105 105 100 100 95 95 90 90 85 85 80 80 75 75 70 Real (price=adjusted) yen rate 70 65 65 60 60 55 55 50 50 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 24
- 25. Easy Money Alone Can’t Cure Deflation 350 350 Nom inal GDP M2+CDs ex-base 300 300 Monetary base 250 250 Overnight rate dropped from Index (1990=100) 2.3% in Jan. 1995 to 0.5% in Sept. 200 200 150 150 100 100 50 50 0 0 1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010 25
- 26. Alternatives on Tax • Use fiscal and monetary stimulus to restore full demand • Combine this with new law to raise taxes once economy hits certain benchmarks, e.g. narrowing of output gap (which will also fight deflation); that will reassure bond markets • Why tax consumption when structural defect is chronically anemic consumption due to low consumer income? • Better taxes that would raise revenue and GDP growth: Taxpayer ID, Rezone fake farmland, Change real estate taxes, Change land usage laws 26
- 27. Structural Reform Agenda • Energy policy • More domestic and int’l competition, including imports and inward FDI • Easier for new companies to challenge incumbents (cf. current problems in electronics) • Improve productivity in backward sectors of dual economy by raising to global benchmarks • Real labor market flexibility, not wage austerity via irregulars • Raise household share of national income • Real social safety net making Japan safe for creative destruction 27